RTM Co failing to provide notices and placing new leases in limbo!

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I own the freehold ground rent interest of a large block of flats where there used to be a Management Company but there is now a RTM Company in its place. The RTM Company has been in existence for 5 years and has throughout that time employed a managing agent who is a member of ARMA.

I have owned the freehold for 2 years now – during which time I have noticed that the RTM Company is failing to observe the Landlord covenants and breaching its own Articles of Association. The managing agent appears to be allowing the RTM Company to pick and choose which aspects of the Landlord’s covenants they deal with whilst ignoring some very critical Landlord’s covenants.

1. Contrary to the leases, they are not having the annual accounts certified and audited
2. Contrary to the leases, they have not had the building re-assessed for insurance purposes. They admit that the last assessment was done in 2007
3. Contrary to the leases, they are not monitoring and enforcing lessee covenants – such as prior written consent for subletting
4. Contrary to the leases – they are not monitoring or enforcing lessee covenants. They admit to never having inspected the flats and so they are not aware of any repair and maintenance issues within them. I am aware that there are some repair and maintenance issues with some of the flats. I brought these to the RTM Co.’s attention over 6 months ago but I have not received any status updates
5. Contrary to the RTM Articles of Association, they are charging new members £100.00 to join the RTM Company rather than £1.00

And now I have just discovered that two flats were sold recently – one in early January 2016 and another in early April 2016. These sales occurred without my knowledge as the RTM Company did not provide me with 30 days prior notice of assignment. Had the RTM Company given me the requisite notice I could have intervened to halt / delay completion of the sales.

The reason that I would have intervened is because there is an un-meetable restriction on disposition contained in the leases. The leases state that there is to be no disposition without the outgoing lessee contemporaneously ensuring that the incoming lessee enters into a direct deed of covenant with both the Lessor and the Management Company. The outgoing lessee must also ensure that the incoming lessee becomes a member of XYZ Limited Company. This latter point (membership of XYZ Limited Company) is and always has been an impossibility and must have been a mistake made by the original Draughtsperson of the leases.

Anyway in the case of both sales the RTM Company did not send a certificate of compliance to the buyers’ solicitors (a certificate of compliance is required by the leases). The RTM Company did however complete deeds of covenant with the incoming lessees. The RTM Company did not issue me with a copy of these deeds of covenant by the way and the first I knew of the sales completing was when I was contacted by the incoming lessees’ solicitors at the end of June 2016 because both incoming lessees have had their applications to register their ownership rejected by Land Registry. Under the circumstances, both title registers still list the outgoing lessees as registered proprietor. The outgoing lessees’ lenders have already removed their charges on the two flats.

We are now in a position where the two incoming lessees are in legal limbo. All the completion monies have transferred and one of the incoming lessees has already moved in. The second incoming lessee has already rented out their flat (without prior written consent, contrary to the leases). All the leases are affected by the same un-meetable restriction and there are currently another 7x flats in the block up for sale at the moment.

When I asked the Leasehold Advisory Service to whom I should send future ground rent demands (the outgoing lessees or the incoming lessees) I got the following response:

If the original lease was granted after 1st January 1996 (and it was) the Landlord & Tenant (covenants) Act applies. This states that on the” assignment ” of a lease the lessee assigning (outgoing lessee) ceases to be liable for the covenants in the lease, i.e. to pay service charges and ground rent. An “assignment ” under this Act includes an “equitable assignment”. An equitable assignment is where the property has been transferred but not registered at the Land Registry.

Based on the above, there has been an equitable assignment and the outgoing lessee should not be liable for service charges based on the above Act. However, there is a further complication, in that the same Act states that if the assignment is made in breach of covenant or by operation of law it is an “excluded assignment” and the outgoing lessee’s release from covenants does not apply. Arguably, the assignment was made in breach of covenant as the outgoing lessee did not ensure that the incoming Lessee became a member of XYZ Limited Company,even if this is an impossibility.

My questions are these:

1. To whom do I now send ground rent demands (the outgoing lessees or the incoming lessees?)
2. Given all the above circumstances, would I have sufficient grounds to succeed in an application to end the RTM?
3. If I do not apply to end the RTM, what are my options in terms of all the failings listed above?

Vivienne

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My company David Adams Surveyors Ltd (DASL) is regulated by higher standards set by Royal Institution of Chartered Surveyors (RICS) and we often take over properties from the mismanagement of RTM companies.

I can only imagine the sh*t-fight which will ensue with the new lenders and the solicitors who let this happen!

I've just completed the process of a full remortgage & equity purchase of a property business following the exit from the sector of high street banking (single business lending secured on multiple properties I mean) so I've had a baptism of fire for the past 2 years sorting these types of problems out (including mistakes or things missing in leases & companies in leases which no longer exist!).

I would certainly invoice the incoming Leaseholders in the first instance as they are likely to pay. You only need concern yourself with a step 2 if they don't. They are going to be in a whole world of bother as the new lenders will want their funds back ASAP now that they can't secure their lending. The buyers solicitor will be liable via their prof indemnity, so I guarantee they will be in touch to resolve the issues regarding the non- registry of the new lenders charges.

It seems that an amendment will be required to the leases from what you've said. This isn't the correct legal term, I can't call it to mind, but we had something similar & the buyers solicitor drew up something which was to be registered and had the effect of amending the lease.

A lot of the items not attended to by the RTM are things which are typically passed over in my experience, but as the freeholder one would have thought you would be in a position to insist upon their fulfilment if you wished. Can you not insist upon an annual meeting between yourself and the managing agent? Where you can pin them down on the issues you've raised?

Well, there is still no movement in this saga and the two incoming lessees are still in legal limbo. When I first started noticing the shortcomings of the RTM Co. last year, I offered meetings with the RTM Co. and their managing agent several times and each offer was refused. The RTM Co. and managing agent were of the (mistaken) impression that they needn't adhere to the lease terms and they could simply do as they liked.

I did consider invoicing the incoming lessees for the ground rent that is owed - however, I've been informed that this might be construed as a waiver of the breach committed by the outgoing lessees (the excluded assignments). Brutal though it sounds, I have been told that a better route may be to get breach of covenant determinations on the outgoing lessees as a precursor to forfeiture which would impact the incoming lessees - as they are now in possession of the flats. Whilst forfeiture is a rather toothless remedy (when was the last time you heard of a successful action?) the mention of the 'f' word may be enough to get things moving. What do you think?

Solicitors were involved in the sale of both flats. In each case the conveyancing solicitors proceeded to completion without varying the leases to modify or remove the un-meetable restriction. Their defence is that they did not notice this requirement and the RTM Co. did not alert them to it. The RTM Co. unwittingly abetted the conveyancing solicitors by completing deeds of covenant with the incoming lessees. Their defence is that they did not know of the requirement! When the RTM Co. discovered its mistake, it could not issue compliance certificates to the incoming lessees. The RTM Co. sat quiet on all of this and the first we knew that there was a problem was when the incoming lessees' solicitors had failed to register the incoming lessees' ownership with Land Registry. At that point, they (the incoming lessees' solicitors) emailed us directly to flag the matter up. So, one incoming lessee has been in legal limbo for 9 months and the other for 5 months!

I'm surprised that the new lenders haven't put more pressure on the solicitors to get this resolved as they and the purchasers are the real losers in all this. Have the lenders even been informed, or are the solicitors hoping to resolve it without them being aware of the problem?

What is the real downside to you as freeholder in all of this? I'm not sure in your position I'd be prepared to spend money on legal representation in a forfeiture action. Your main interest would be in your income stream of ground rents unless I'm missing something.

If you can't insist on meetings with the RTM co I would say you will need to do some homework regards your rights to have them replaced. Perhaps someone who's been in this position could offer some advice. My first course of action is always to put my complaints in writing, stipulating what you expect to be done to resolve the situation, (which I assume you've already done). Also ask yourself what the real downside is to you of each complaint and focus on things which have a genuine negative impact on you as a Freeholder. If they mainly affect the Leaseholders perhaps you'd be better writing to them directly pointing out the RTM co failings and how these will negatively impact them and their investment and suggesting they raise the complaints, or consider looking for a replacement.

It sounds like the Leases will need amending though. Is this something which could be organised through the RTM co engaging a solicitor to come up with the variation at the joint cost of the leaseholders; registering these with HMLR and then allowing the new charges to be registered and the sales to transfer from the other 7 currently for sale?

As a side note, you may wish to write to the 7 leaseholders whose flats are for sale and notify them of their obligation under the lease to notify you of any sale and ask them to provide a copy of your letter to their solicitor. You can then inform their solicitors of the specific issues with the lease which need to be addressed to prevent this happening again when they've been in touch and you have theirs contact details.

The real downside to me is the ground rent income and also the income that I should be due from ad hoc admin fees e.g. subletting, assignment, charge etc. All this is being lost due to the RTM Co.'s failings. There is also the issue that at each of these actions, e.g subletting, assignment, charge etc. information is required to be given to me and the RTM Co. to keep us all on the right side of Health & Safety requirements. This is being lost too.

And yes, the RTM Co. has FINALLY got a solicitor on board whom is demanding that I agree to lease variations across the development. The solicitor refuses to address the very genuine concerns I have raised about the other matters - such as possible under-insurance of the building. Oh yes, I forgot to mention that last month the RTM Co. sent me a copy of the buildings insurance schedule for 2016-17 which shows that the building sum insured has dropped by 450K since the previous year! This is in a Grade II listed building which has not had a building reinstatement valuation done since it was converted 12 years ago The RTM Co. has yet to send me a copy of the building reinstatement valuation that supports this and I suspect that they did not even commission one even though I managed to get them to agree to doing this prior to renewal this year and the service charge budget contains provision for this.

So whilst I realise that the leases do indeed need to be varied, I am sorely tempted to dig my heels in and refuse to cooperate until all the other issues have been satisfactorily addressed. Can I do this (withhold cooperation on the deeds of variation) or can I be compelled to cooperate?

Ah yes, I see your point about the missed fee opportunities. I presume these are spelled out in the leases? If so what's to stop you retrospectively invoicing leaseholders for services after the fact?

I think in your shoes as a proactive step I would write to leaseholders and spell out their obligations to notify you of a sale or a letting etc which may help. Also keep an eye on right move for letting a listings and for sale listings (assuming you have the time that is!!) & boards at the properties and contact letting agents re their obligations.

I realise these are just sticking plasters and don't solve the actual problems. If you are local to the RTM co office you could try turning up in person to request the copy of the insurance valuation etc. & you can certainly drag your feet regarding the lease issue, but I really can't help with your questions in this regard.

I can only suggest you contact the Leasehold advisory service and ask for advice; read whatever you can find. There was a suggestion of a good publication I seem to recall in an earlier comment. Arm yourself with as much knowledge as possible and when you know what your recourse is you can explain what you intend to do if the RTM CO doesn't comply with the requirements of the leases. This may be enough to get some movement.

I believe it is fairly cheap to instigate an application to the Leasehold Valuation Tribunal, it is the legal costs which can cripple you. You also need to check any provisions which may exist regarding parties being responsible for other parties legal costs (regardless of the outcome).

You could make an application to the Leasehold Valuation Tribunal using as grounds Part 2 of the Landlord & Tenant Act 1987 to end the RTM due to breach of obligation under the lease. Procedures for an application under Part 2 of LTA 1987 Act are included in the booklet 'Application to LVT' you can get help with this from the LVT.

Even if you just find out what's involved with this and tell the RTM Co that you intend to file an application to have them removed by the LVT for failure of their obligations you may find they take your requests more seriously.

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